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Market watchers say the decision of the Monetary Policy Committee of the Central Bank of Nigeria to retain the benchmark rate at 27.50 per cent will provide near-term relief for the real sector.
This was indicated in the post-MPC macroeconomic report of Meristem Securities released on Saturday.
At the end of the 299th MPC meeting on Thursday, the committee was unanimous in its decision to hold all parameters and thus decided to retain the MPR at 27.50 per cent, the asymmetric corridor around the MPR at +500/-100 basis points. Retain the Cash Reserve Ratio of Deposit Money Banks at 50.00 per cent and Merchant Banks at 16 per cent and retain the Liquidity Ratio at 30.00 per cent.
Commenting on this decision, the analysts at Meristem said, “The MPC’s recent decision is anticipated to ease pressure on the real sector while supporting FX market stability. Fixed-income yields are expected to remain elevated and stable, while we anticipate a positive bias for the equities market as investors price in the impact of a more stable macroeconomic environment on equity assets.”
Breaking it down, the analysts said, “As anticipated, the MPC’s decision to keep the monetary policy rate at 27.50 per cent reflects easing inflationary pressures—particularly in light of the rebased CPI figures—as well as relative stability in the exchange rate. While borrowing costs remain elevated, this decision suggests a period of rate stability for businesses and consumers, signalling a potential shift away from the monetary authority’s three-year hawkish stance (since May 2022). This could support business investment and spending, both critical to driving economic growth, especially in the real sector.
“Additionally, the improvement in Nigeria’s PMI to 50.20 points in January 2025, largely fuelled by higher production activity in the industrial and agricultural sectors, suggests a potential recovery in the real sector output. Moreover, sustained exchange rate stability is expected to benefit import-dependent industries, boosting output in these sectors and enhancing overall economic growth prospects. Overall, the decision to keep the MPR unchanged is expected to provide some respite for the real sector, as it averts additional pressures on financing conditions. While interest rates remain elevated, stability in borrowing costs should prevent further strain on businesses. Additionally, expectations of a relatively stable naira should help moderate financial stress, supporting operational resilience. Consequently, we anticipate gradually easing pressures on the real sector over the near to medium term.”
In the fixed income market, Meristem said that the market was also already adjusting, as seen in the recent downward trend in the yields of Treasury bills, with the stop rate on longer-dated bills dropping to 18.43 per cent at the recent auction, from 20.32 per cent at the previous auction, with some investors bidding as low as 16.50 per cent.
The analysts continued, “This decline reflects shifting market sentiment as investors anticipated the MPC’s stance, particularly after the Consumer Price Index rebasing that led to a lower inflation figure. With the MPR maintained at 27.50 per cent, we observed significant buying interest across the yield curve, leading to a sharp decline in average T-bill yields by 175 bps to 20.21 per cent on Thursday (vs. 21.96 per on the previous day). In the near term, the market may experience a period of yield stabilisation rather than another significant decline. However, if inflation continues to ease, investors may start pricing in the possibility of future rate cuts, which could exert further downward pressure on yields.
“Moreover, liquidity will remain a key driver in the movement of yields, with a larger volume of maturing bills expected in March (N2.64bn vs. N2.23bn in February) and coupon payments (N601m vs. N436.17m in February), coupled with rising FAAC inflows from improved government revenues in March; there could be heightened demand for fixed-income instruments, which may drive yields further lower in the secondary market.”
Another asset management firm, Afrinvest, applauded the MPC’s decision, saying, “We aligned with the committee’s decision to maintain status quo on policy parameters in the current period as it helps strike a balance between foreign portfolio investment retention and inflation control on the one hand and the illusionary effect of the ongoing rebasing of key national statistics.”
Cowry Asset Management Limited, in its weekly market report, aligned with the sentiments that the pause in rate hikes is expected to result in lower yields in the fixed-income market, driven by market expectations of possible rate cuts in the upcoming MPC meeting.
